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Taxation rules for NRIs

Non-resident Indians need not pay all the taxes that are applicable to residents.

Here are some exemptions, deductions and tax-saving tips that NRIs can avail of.

KHYATI DHARAMSI

Juggling finances in one country is bad enough; having to do it in two can be baffling.

When it comes to filing taxes, NRIs find themselves in this unenviable position. The income

tax rules that apply to NRIs are different from those that are valid for residents. Certainincomes resulting from remittances and investments in the home country are either exempt

or taxed at concessional rates, says Rajesh Srinivasan, leader, global employer services,Deloitte India. Heres a quick guide to NRI taxation.

Taxes applicable

The most commonly asked question is

whether you need to pay taxes in India aswell as your current resident country.

Answers Ameet Patel, tax partner at Sudit K

Parekh & Co: The income which is earnedoutside India by an NRI is not taxed here.

While the interest earned on a savings bankaccount for resident Indians is taxed, an NRI

doesnt have to pay tax on the interestincome in a non-resident external (NRE)

account or foreign currency non-resident

(FCNR) account. You will need to be carefulabout the taxes you pay in your new home

country as some income that is exempt inIndia is taxed abroad. Dividend income

received from Indian companies is exempthere, but you have to pay tax on it in the

US, says Bhargav Vatsaraj, a chartered

accountant.

Filing returns

There is no need to file income tax return if you dont have any income here. However, ifthe income accruing in India through capital gains, rent, dividend or interest is beyond the

threshold limit, you will have to file tax returns. Here, too, you can claim certain deductions.For instance, if you own a house in India which you have rented out, you can claim a

standard deduction of 30% on the annual net rent received, that is, gross rent received

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minus municipal taxes paid, if any. The interest payment made every year for a home loan

availed of in India or outside India is also allowed as a deduction in case of a rented

property, says Sonu Iyer, tax partner, Ernst & Young.So, for 2011-12, an NRI (male and below 60 years) should file tax return in India if his

income exceeds 1.8 lakh, while a person above 60 years, who earns more than 2.5 lakh,will also have to file it. The due date for filing the return is 31 July of the year following the

relevant tax year.Says Vatsaraj: You have to declare the income earned in India while filing tax returns in

the foreign country too. If the latter has a Double Tax Avoidance Agreement (DTAA) with

India, it will help you get tax credit for the taxes paid here.There are situations when you need not file returns. Patel says, For NRIs, there is a

special chapter (XII-A) in the Indian IT Act, according to which if he earns a specifiedincome and the tax, if any, has been deducted at source, he need not file a return in India.

In most cases, regulators have mandated tax deductions before handing over money toNRIs. So, your rental income or mutual fund withdrawals will be deposited in your account

after taxes have been cut. The rates are the same as that for residents.

Investments

If, as a resident Indian, you made some investments and redeemed them after becoming an

NRI, these will be treated differently. For instance, NRIs cannot extend the tenure of theirPPF account. When the pre-existing PPF accounts are closed, the amount withdrawn will

not be treated as income but as capital receipts, says Patel. The investments in existing

PPF accounts are held till maturity on a non-repatriation basis.Capital gainslong-term or short-termwill be applicable when you redeem/sell your

past investments. If you sell shares that are listed on a recognised stock exchange in Indiaafter holding them for more than a year, you will not have to pay tax on the capital gain

provided the securities transaction tax has been paid, says Iyer.If an NRI sells shares and debentures of an Indian company that he had acquired using

foreign currency, the taxation process will require currency conversion and re-conversion forcapital gains calculations. These cap ital gains will be taxable at the rate of 10% and no

indexation benefit shall apply, explains Iyer. Some of the rates may depend on the originof the invested money. When an NRI sells assets in India, he can opt for a concessional20% tax scheme under Chapter XII-A, which is only available on investments in India from

funds remitted by an NRI, says Vatsaraj.An NRI doesnt have to pay tax on property or assets he inherits in India. However, any

rental income or profit from such property or its sale will be taxable in India, says Iyer.

Tax-saving tips

NRIs can save on these taxes by investing inspecified schemes. These include pension

plans, life insurance policies and taxsaving mutual funds. The repayment by an NRItowards principal amount of home loan is eligible for deduction up to 1 lakh under Section

80 C, while the interest payment is also allowed as a deduction. Also, under Section 80D,

NRIs can purchase a health insurance policy here for themselves, their family as well asdependent parents, and claim deduction up to 35,000 for the annual premium paid, says

Iyer. However, some investment avenues have been restricted by the RBI. So, an NRIcannot invest in the National Savings Certificates, Senior Citizens Savings Scheme and post

office time deposits or open a fresh PPF account.If you have been repaying an education loan taken for yourself, your child or spouse, the

interest paid can be claimed for deduction. Similarly, your philanthropic interests in thecountry can help you claim benefits under Section 80G. You can also save tax if you invest

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the gains earned from the sale of an asset within a specific period. You can claim

exemption on long-term capital gains from the transfer of a foreign exchange asset if you

invest the sale proceeds in specified schemes within six months of selling the asset. Theamount of exemption is calculated based on the amount reinvested, says Iyer.

NRIs can put their money in tax-saving bonds too. Capital gains up to 50 lakh earnedfrom selling a capital asset can be invested in bonds of National Highways Authority of India

or Rural Electrification Corporation, says Vatsaraj. Investment income from specifiedassets, typically foreign currency bonds, are subject to tax at 20% as against the maximum

rate of 30%. NRIs can invest in such assets and benefit from the lower rate. Also, an NRI

can avail of lower tax rates on interest income through beneficial treaty provisions. So, if heis based in the UAE and the interest income is remitted from India, he is eligible for lower

rates as India has a DTAA with the country, says Srinivasan.

Tax-saving measures

NRIs dont need to pay tax in India on the income earned abroad or even file returns if taxis deducted at source.

Investments in capital gains bonds, such as Rural Electrification Corporation and National

Highways Authority of India, can be made to save tax on capital gains earned from sellingan asset.

NRIs can invest in foreign currency bonds, which are taxed at 20%, while income fromother bonds is taxed at a maximum rate of 30%.

Inheritance is exempt from tax, but the rental/sale income from the inherited asset is

taxable. Capital gains tax can be avoided by investing in new property.

Interest income in NRE and FCNR accounts is exempt from tax.

NRIs can also claim a standard deduction of 30% of the net rent received.